Market conditions and fragmentation foster a climate ripe for consolidation
Image courtesy of Topsoe
Latin America has the ideal petrochemical and chemical market for distributors. A scarcity of local production, a dynamic sociopolitical environment, volatile currencies and complex logistics all require local knowledge and capacity. Furthermore, many international producers want to sell to Latam’s large consumer market, but do not want the risks associated with long-term capex investments. For these reasons, a wide variety of distributors are active in the region, from the largest multinationals to local specialists. However, the financial strain placed upon companies that lack liquidity, storage capacity or economies of scale over the last two years is pushing a fragmented market towards consolidation.
The three biggest chemical distributors in the world, Brenntag, Tricon Energy and Univar Solutions, according to 2021 sales figures from ICIS, all have a significant presence in Latin America. When speaking to GBR, all three of them mentioned how current market conditions have heightened the potential for M&A in the distribution and chemical business in the region.
German Torres, CEO of Brenntag Latin America, evaluated the challenges facing the industry: “Working capital management is a huge issue for everyone – distributors, customers, suppliers. The concern is not due to demand growing, but rather because pricing, which has significantly increased over the past couple of years. High logistics and supply chain costs leaves little room for flexibility, and businesses that do not have liquidity are suffering.”
German company Brenntag, which posted record financial results in 2021 headlined by operating gross profit of over €3.37 billion, not only has the liquidity to weather turbulent conditions, but also to take advantage of M&A opportunities. Torres mentioned that the Latam region offers “tremendous opportunities for consolidation and growth,” especially in the biggest geographies such as Mexico and Brazil, but also Colombia, Argentina and Ecuador. “The challenge is choosing which opportunities offer the most value,” he added, revealing that Brenntag has been working to extend chemistries and portfolios well developed in North America to the entire Americas, which has led to opportunities to amplify distribution agreements, such as the deal announced in March 2022 with Arkema to distribute waterborne resins in Mexico.
Jorge Buckup, Univar Solutions’ president for Latin America, suggested that there is high potential for growth as no one player has a large share of the total market in the region, and the share of total distribution within the chemical industry is still small as compared to the US and Europe. Commenting that consolidation has always been a lever for Univar to grow the company, Buckup gave the example of the December 2021 acquisition of distributor Sweetmix in Brazil to expand Univar’s food ingredients and CASE (Coatings, Adhesives, Sealants and Elastomers) portfolio. “We continue to look at bolt on acquisitions where we can find both commercial and cost synergies, and in markets where we can grow above average economic growth rates and that are less cyclical. In general, this tends to be, but is not limited to, the specialties markets such as personal care, food, CASE and pharma,” he said.
Rafael Gerlein, Americas lead for plastics at Tricon Energy, pointed to the company’s plastics and fertilizers business lines as the two contributing most to growth in Latin America. Describing Latin America as the backyard for US-based plastics producers, Gerlein weighed in on the factors that strengthen the case for M&A: “New entrants, an abundant supply of product, global supply chain challenges, a more conservative financial sector, and a downturn on the economic cycle will all lead to a more competitive environment, and this will open up opportunities for consolidation.”
Tricon’s business in the region covers trading and distribution across four main product lines; chemicals 33%, fertilizers 25%, plastics 21%, fuels and others 21% (based on volumes in 2021), with Latin America representing approximately 20% of the company’s global annual revenue in 2021, detailed Gerlein.
Pochteca has been one of the active chemical distribution players in Latin America in recent years, with its 2020 acquisition of Ixon Latam adding Colombia, Peru, Chile and Argentina to a regional footprint, which already included Mexico, Costa Rica, El Salvador, Guatemala and Brazil. Eugenio Manzano, Pochteca’s executive director, commented that the company is currently enjoying organic and profitable growth integrating the recently acquired or created business units, like environmental and third-party logistics, working to replicate successful segments from one country to another and growing its supplier and customer base. He added that Pochteca is always interested in looking at opportunities that can bring synergies or complementary regions or segments to its portfolio.
Alanlyzing the Latam distribution segment, Manzano said: “Low trade barriers, increased regulation and customers and suppliers seeking to reduce the number of channel partners present an ever-greater challenge to smaller and medium size firms that are not highly specialized. Economies of scale in supply chain, logistics, information technology, technical capabilities, training and purchasing power are necessary to add value and lower total cost in a competitive and sustainable fashion.”
One of the notable M&A transactions to take place in 2022 was the sale of distributor GTM to Dutch specialties group Caldic, which closed on March 1st. Rodrigo Gutierrez, former CEO of GTM and now Latam CEO for GTM Caldic, revealed that talks to merge the two companies began in early 2021, as synergies were identified to GTM’s capacity in Latin America’s industrial markets to Caldic’s strength in the life sciences end markets. “We have been able to transfer knowledge, have more volumes to negotiate, consolidate logistics, and optimize in a way that we were not able to do before,” said Gutierrez, noting that the GTM Caldic brand will be used until the end of 2022, with the Caldic brand adopted from January 2023.
“Nowadays, anyone can access international markets via just an email or even a text. That has increased competitivity, but understanding businesses at a regional level and having only one interlocutor for suppliers and clients is very important. Consolidating trust is one of the main sources of growth for companies.”
Martín Font, General Manager, MCassab Argentina
The merger has not stopped the company from making further acquisitions, including the move to buy Active Pharmaceutica in Brazil in June 2022. “Latin America is a very fertile market for growth with significant opportunities,” stated Gutierrez, commenting that GTM looks for companies that are strong in their niche markets and can add value, with a particular focus on (but not limited to) the life sciences segment. He added: “In spite of political changes in Latam, we believe in the region for the long term and will continue making acquisitions.”
Brazilian distributors expand internationally
Of all the Latin American markets, the largest country in the region, Brazil, has the domestic market, complexity of logistics, and specific conditions (such as being the only country in the region to speak Portuguese) to require a vast array of distributors. Over time, a number of these distributors have started to branch out within the region and further afield.
Química Anastacio was founded in 1941, and has since created an international trading arm to its business, Anastacio Overseas, which initially expanded through Latin America, and has recently opened two new offices in Nigeria and South Africa to penetrate the African market. Matthias Vorbeck, managing director, revealed that Anastacio Overseas expects to increase its turnover from US$175 million in 2021 to US$250 million in 2022, citing the financial strength of the group that allows the company to purchase materials upfront as a factor in its success.
Jan Krueder, CEO of Química Anastácio, elaborated on the company’s strategy to serve 18 different segments, each with their own strategy, technical team and marketing budget, launching 10 new products per month to achieve an annual target of 15% growth. “If one segment runs into crisis, there are other segments that can compensate. For example, the construction and home care markets are experiencing lower demand, but there is growth in the agriculture, food ingredients and pharma markets.”
The model of establishing a distribution network in Brazil and then replicating this business strategy abroad has been adopted by MCassab, a family company established in 1928. “15 years ago we began developing MCassab’s Latin American project in Argentina, and then expanded to Colombia in 2019 and Paraguay in 2020. We also have a subsidiary company in China,” said Martin Font, general manager of MCassab Argentina.
Font explained that the company’s continuous growth in Brazil has been the foundation of its regional expansions, and pointed to the US$35 million investment in a 55,000 m2 distribution center in Jarinú in São Paulo state as an example of MCassab’s focus on creating capacity to serve the animal nutrition, animal health and human nutrition segments.